Chapter 5 Futures and Derivatives Problems

Chapter 5 Futures and Derivatives Problems

Chapter 5 Assignment

1. A stock index currently stands at 350. The risk-free interest rate is 4% per annum (with continuous compounding) and the dividend yield on the index is 3% per annum. What should the futures price for a four-month contract be? (10)

2. A 1-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $40 and the risk-free rate of interest is 5% per annum with continuous compounding. (20) a. What are the forward price and the initial value of the forward contract? b. Six months later, the price of the stock is $45 and the risk-free interest rate is still 5%. What are the forward price and the value of the forward contract?

3. The risk-free rate of interest is 7% per annum with continuous compounding, and the dividend yield on a stock index is 3.2% per annum. The current value of the index is 150. What is the 6-month futures price? (10)

4. Assume that the risk-free interest rate is 4% per annum with continuous compounding and that the dividend yield on a stock index varies throughout the year. In February, May, August, and November, dividends are paid at a rate of 5% per annum. In other months, dividends are paid at a rate of 2% per annum. Suppose that the value of the index on July 31 is 1,300. What is the futures price for a contract deliverable on December 31 of the same year? (10)

5. The two-month interest rates in Switzerland and the United States are, respectively, 1% and 2% per annum with continuous compounding. The spot price of the Swiss franc is $1.0500. The futures price for a contract deliverable in two months is also $1.0500. What arbitrage opportunities does this create? (10)

6. The spot price of silver is $25 per ounce. The storage costs are $0.24 per ounce per year payable quarterly in advance. Assuming that interest rates are 5% per annum for all maturities, calculate the futures price of silver for delivery in nine months. (10)

7. An index is 1,200. The three-month risk-free rate is 3% per annum and the dividend yield over the next three months is 1.2% per annum. The six-month risk-free rate is 3.5% per annum and the dividend yield over the next six months is 1% per annum. Estimate the futures price of the index for three-month and six-month contracts. All interest rates and dividend yields are continuously compounded. (10)

8. Suppose the current USD/euro exchange rate is 1.2000 dollar per euro. The six month forward exchange rate is 1.1950. The six month USD interest rate is 1% per annum continuously compounded. Estimate the six month euro interest rate. (10)

 9. The spot price of oil is $50 per barrel and the cost of storing a barrel of oil for one year is $3, payable at the end of the year. The risk-free interest rate is 5% per annum, continuously compounded. What is an upper bound for the one-year futures price of oil? (10)

10. A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock. (20)

a. What are the forward price and the initial value of the forward contract?

b. Three months later, the price of the stock is $48 and the risk-free rate of interest is still 8% per annum. What are the forward price and the value of the short position in the forward contract?